American Public Education Inc (APEI) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the American Public Education Incorporated third quarter 2009 earnings call. My name is Jen, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Chris Symanoskie, Director of Corporate Communication. Please proceed, sir.

Thank you, operator. Good evening, everyone, and welcome to American Public Education's third quarter 2009 results conference call. The presentation materials that accompany today's call are available in the Webcast section of our Investor Relations website and are included as an exhibit to our current report on Form 8-K filed earlier today. Our quarterly financial statements are also available at that URL.

During the Q&A session we ask the participants limit their questions to one per caller to enable broader participation.

Please note that statements made in this conference call regarding American Public Education or its subsidiaries that are not historical facts are forward-looking statements based on current expectations, assumptions, estimates and projections about American Public Education and the industry. These forward-looking statements are subject to risks and uncertainties that could cause actual future events or results to differ materially from such statements. Forward-looking statements can be identified by words such as anticipate, believe, could, estimate, expect, intend, may, should, will and would. These forward-looking statements include, without limitation, statements about the fourth quarter and the full year 2009 outlook and statements regarding expected growth.

Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including risk factors described in the risk factor section and elsewhere in the Company's annual report on Form 10-K filed with the SEC. The Company undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Today our speakers are Wallace Boston, Jr., the Chief Executive Officer of American Public Education; and Harry Wilkins, our Chief Financial Officer.

Now, at this time I'd like to turn the call over to Wally Boston. Mr. Boston?

Thank you, Chris. Good evening, ladies and gentlemen. In today's conference call we'll comment on our third quarter results and discuss important developments and operational highlights. Harry Wilkins, our Chief Financial Officer, will discuss our financial performance, elaborate on factors driving financial results and review our expectations for the remainder of the year.

I'm proud to say that in the third quarter of 2009, student enrollment at American Public University System increased 44% to 59,300 students. Net course registrations increased 42%, driven in part by a 41% increase in net course registrations from new students. These solid growth rates are a result of strong increases in both military and civilian student enrollment, continued strong retention rates and an increase in the percentage of students returning for a second degree.

We've recently received approval for and launched a master's degree in legal studies and a bachelor's degree in general studies. These two new programs bring the total number of degrees offered to 76 degrees. We currently have one new degree pending approval by the HLC and a robust pipeline of new degrees under development.

In addition to offering degrees in business, education and information technology like most other online universities, APUS offers unique degrees such as emergency and disaster management, space studies, strategic intelligence and a number of [laborious] degrees just to name a few.

With each degree and with every student we strive for quality through a sound and effective data driven approach to managing all aspects of the learning enterprise. Our focus on academic quality translates into high student and faculty satisfaction as well as increased recognition from peers, employers and students.

American Public University System was recently honored with the Ralph E. Gomory Award for Quality Online Education by the Sloan Consortium, a renowned nonprofit group of higher education institutions dedicated to improving the quality of online learning.

We are the first for-profit institution to win this award from the Sloan Consortium, which is the top award in the world of online higher education. This award places us among a distinguished list of institutions recognized by higher education peers. Penn State and the University of Illinois Springfield, Fairleigh Dickenson University and the University of California Berkeley Online Extension are among the institutions that have won the highest honors from Sloan over the last 15 years. Additionally, Dr. Phil Ice, APUS Director of Course Design, Research and Development was awarded the 2009 Sloan-C Effective Practice Award.

Moving on to slide number four, we are also pleased to announce that just yesterday AMU's Emergency and Disaster Management Program received the 2009 Academic Recognition Award from the International Association of Emergency Managers, IAEM, at their 57th annual conference. IAEM is a nonprofit educational organization dedicated to saving lives and protecting property during emergencies and disasters. The Academic Recognition Award honors an academic institution that has helped shape the broader field of emergency and disaster management and made a significant contribution to the formal education of students pursuing careers in emergency management.

IAEM recognized AMU as the first online university to be accredited by the Foundation of Higher Education for disaster in emergency management and homeland security. And the active involvement of AMU faculty with the Federal Emergency Management Agency, or FEMA, higher education initiative. Additionally, IAEM specifically noted AMU's commitment to its military and civilian emergency management students.

We were also recently ranked ninth in Forbes.com listing of America's Top 200 Best Small Companies. Needless to say we are very proud of our students, our program and our university. The honors we receive from industry and professional groups like these underscore the tremendous value of our programs as well as the exceptional abilities of our students.

Remaining affordable is one of the foundational components of our higher education philosophy. At the undergraduate level our tuition is comparable to the average tuition of public universities. Our fees are minimal. Moreover, we have not raised undergraduate tuition since 2002, and we offer a book grant program to undergraduate students, saving them hundreds to thousands of dollars.

We recently launched a new website redesigned for changing mix of students, with new student specific content, streamline program and course details and enhanced academic planning tools.

At the graduate level our tuition is priced significantly below that of most public and private institutions. Today we are announcing a graduate tuition increase from $275 to $300 per credit hour, which is about $900 per three-credit course for courses beginning in April 2010 or later. That tuition will apply to both civilians and military students. Total tuition for a complete graduate degree of 36 credit hours will be $10,800, a virtually unmatched value in online higher education programs offered by regionally accredited institutions.

Moving on slide number five, our core foundation in the military remains as robust as ever. We continue to expand our influence and presence throughout the military community through the effective execution of our military strategy, net course registration from students using tuition assistance increased 32% over the third quarter of last year. This increase was even more impressive given that last year's third quarter military growth was 53%.

This quarter we gained additional office hours at four military bases. And our initial efforts to reach out to military spouses have proven successful. We now have nearly 800 military spouses enrolled at APUS through a program which allows military spouses to apply for up to $6,000 in financial assistance for education from the Department of Defense.

[Edge Adventures], a research and consulting firm, forecast a 20% increase in the number of degree seeking students taking 80% or more of their classes online in 2009. Our success within the military illustrates that we have the resources and knowledge to expand into the more rapidly growing civilian markets. In fact, net course registrations from Title IV students increased 97% in the third quarter of 2009.

Let me take a moment to explain where our rapidly growing civilian student population is as a developing and significant piece of our story.

First our civilian students take more classes per student annually than our military students. Second, retention among-- excuse me-- civilian students is higher than among military students. And third, a higher percentage of our civilian students take graduate courses.

While our civilian students do not refer other students at the same rate as our military students, our rapidly growing civilian student population provides an increase in the number of annual classes taken per student as well as an increase in the ratio of graduate courses versus undergraduate courses.

We believe that shift in revenues and margin offsets the increased marketing cost in our business model. More specifically, our marketing strategy is based on a specific sector focus designed to maximize student referrals and minimize untargeted media costs.

Moving on to slide number six, building an institution that can stand the test of time means that we do not cut corners. We invest in new programs, enter new market segments. We made extra effort to pursue specialty accreditation, and we align our organization with community and environmental efforts, including building energy efficient administrative buildings and other environmentally friendly initiatives.

Our customer service efforts start before students enroll with admission counselors who advise students and treat them with respect. Our admissions representatives are salaried professionals who are not incentivized based on student enrollment.

We have an intense focus on collecting analytics across our enterprise, from managing enrollment and retention to assessing outcomes of student learning and faculty satisfaction. We utilize a data warehouse, specialized dashboards, Symantec analysis engines and other tools to help us analyze, manage and improve student learning.

APS-- APUS uses many (inaudible) benchmark tools to measure student engagement and learning. Standardized tests from ETS include the measure of academic proficiency and progress, or the MAP test, and a major field test for specific degree programs. And both of those are administered to graduating seniors.

We also embrace the community of inquiry framework survey as an end-of-course survey to measure student engagement and learning. We are among 700 to 1,200 institutions who participate in a National Survey of Student Engagement, or NSSE, and are also a charter member of the Transparency by Design Initiative.

We believe our mission, program, strategic plan, corporate culture and actions are in line with the Department of Education's focus on expanding access, affordability, transparency and accountability in higher education. While we believe that the existing regulations and accrediting standards are more than adequate for quality focused institutions, we believe that the student-oriented quality focus practices we maintain position us for addressing any changes that may surface from the negotiated rulemaking process.

In closing, our organization is focused on quality and the sustainability of our financial performance. We are effectively delivering strong growth and margin improvement without sacrificing student satisfaction and positive learning outcomes. In fact, due to our high student satisfaction our overall referral rate continues to be over 50%, and approximately 40% of our graduates return for a second degree. I believe we're unmatched in bringing all of these qualities together under one university.

Now I would like to turn the call over to Harry Wilkins to discuss how these efforts translate into strong financial results. Harry?

Thanks, Wally. Moving on to Slide 7, our third quarter 2009 revenue increased 33% to $36.5 million, driven by increases in net course registrations from both military and students.

As we discussed in the second quarter earnings call, our third quarter revenue was negatively impacted by a later start date in the month of September 2009, compared with an earlier start date in September of 2008.

Our operating income before interest income and income tax increased 35% to $8.4 million as a result of continued G&A leverage on seasonally lower revenue.

In the third quarter of 2009 we reported earnings of $5 million or $0.27 per fully diluted share on the high end of our previously issued guidance range. As a result of increased visibility as of the remainder of the year, we've refined our 2009 outlook.

Moving on to Slide 8, before reviewing our guidance for the remainder of the year, I'd like to discuss our operating performance in more detail.

As expected in the third quarter of 2009, instructional cost and services increased slightly as a percentage of revenue from 38-- from 39.8% to 40.4%, due in large part to the fact that more classes are taught by adjuncts in the third quarter. Typically we see a higher rate of adjunct faculty instruction during the summer months as our salaried full-time faculty takes scheduled vacations.

On a full year basis we generally expect ITS to grow in line with revenue with only slight modest leverage over time.

Our selling and promotion expense increased as a percentage of revenue to 15.4% in the third quarter due to the lower revenue related to the timing of the September starts.

For the full year 2009 the Company believes that S&P expenses will be approximately 14% of revenue.

General administrative expenses decreased to the percentage of revenue to 17.7% as we continue to leverage effectively our fixed costs in G&A. We continue to believe that G&A expenses will increase at a lower rate in revenue on a full year basis going forward.

I am pleased that we were able to improve our operating margins by 40 basis points to 23%, despite a seasonally lower revenue growth in the third quarter.

Operating margin for the ninth-month period increased 150 basis points to 24.6%.

Moving along to Slide 9, at September 30, 2009, cash and cash and equivalents increased to $63.8 million, an increase of 34% from $47.7 million at December 31, 2008.

Our cash remains conservatively invested, and as a result is earning less than a 1% return. Until the overall economic picture improves further and becomes more stable, we will continue to accumulate cash and conservative investments.

For the nine months ended September 30, 2009, depreciation and amortization increased to $3.9 million from $3 million in the previous year. And CapEx increased to $8.6 million from $6.9 million in the prior period.

Moving on to Slide 10, in the fourth quarter 2009 we expect net course registrations from new students to increase approximately 37% and net course registrations to increase approximately 38%. This is expected to drive revenue of approximately $42.7 million, an increase of 36%.

The timing of starts within the fourth quarter negatively impacts revenue in the fourth quarter and positively impacts revenue in the first quarter of next year. In other words, we have a late start in December, too. We have a first Monday in December when our classes start, it's the 7th of December, as late as it can be.

We expect net income of approximately $7.9 million, an increase of 57% as we see positive leverage from our IS&P spend and continued leverage from G&A. Thus we expect earnings are approximately $0.42 for a fully diluted share on $19 million weighted average shares outstanding. Earnings include approximately $560,000 of after-tax stock compensation.

Moving on to Slide 11, for the full year our changing mix of civilian and military students accelerated this year. And as a result we made some refinements to our guidance along the way. At the same time we have gradually increased our expectations for overall net course registrations and we are now forecasting approximately 207,800 net course registrations, which is an increase of 41% over the prior year.

We expect this growth to be driven primarily by an increase in net course registrations from new students of approximately 50,000 students, a year-over-year increase of 36%.

These strong results will set the stage for a solid start the next year, especially as civilians become an increasingly important portion of our overall student population.

With increased visibility at the remainder of the year, I am pleased that we are expecting strong growth and net income driven by revenue growth and margin expansion despite the increased advertising costs in civilian markets. The Company believes, therefore, that full year 2009 net income will be approximately $23.5 million, which is an increase of 45% over the prior year above our original expectations and in line with our more recent guidance.

The bottom line is that we expect to earn approximately $1.24 per fully diluted share for the full year 2009, which is an increase of 44% over the prior year.

In closing, we expect to expand our leadership, visibility and presence within the military, and we all proving that we can grow our student civilian student base at a high rate to a targeted relationship-oriented approach to advertising. Our organization is flexible and thoughtful in its approaches to marketing. Our tuition is affordable, and our academic products have the highest quality. All together, these characteristics support sustained growth and give us great confidence in our future financial performance.

Now at this time we would like to answer questions from our call participants. Operator, can you please open the line for questions?

(OPERATOR INSTRUCTIONS) Your first question comes from Bob Craig with Stifel.

Good evening, everybody. Just-- I'll keep within the guidelines here, one question. In order to gauge the impact of the price increase I was wondering if you could convey, you know, a percentage of graduate students, percentage of course registrations by graduate students, just to give us a gauge?

Yes, about 20% of our students are graduate students.

Similar percentage of course registrations, Harry?

Yes.

Okay. Great. Thank you.

The graduate students take a little bit less per year than undergrads.

Great. Thank you.

Your next question is from Amy Junker with Robert W. Baird.

Hi. Thanks. Can-- Harry, can you talk a little bit about-- so the sales and marketing, how you expect that to trend in 2002 as you further penetrate the civilian market? And I would expect that'll continue to inch up as a percentage of revenue. And to Wally's comments, do you think the leverage you get off of those students will be enough to continue to offset that increase?

Amy, this is Wally. I think that, you know, we've said that we expect the number, the S&P number for this year to be about 14%. We're trending pretty nicely at a 40% referral rate. We're trying to manage that growth. And we're really trying to keep the spend down.

We achieved a 40% growth rate in the third quarter. You know, our plans are to give guidance for next year in February. And we'll take a look at guidance for S&P at that time. But right now we're not signaling any major changes at all.

Okay. Thank you.

Your next question is from Mark Marostica with Piper Jaffray.

Thank you. I just wanted to go back to Bob's question a second ago and ask how you plan to roll out the tuition price increase for the graduate programs. Will it be every graduate program that you have that will have the new pricing effective April, or will you move it-- move the-- or introduce the pricing in a more measured fashion?

Thanks, Mark. This is Wally. We're actually going to introduce this price increase across the board and-- for all of our graduate programs. We still are examining specific programs to see if there's price differentials. But at this time we felt that on an overall basis that our graduate program should go up $25 a credit hour. People can register between now and then for classes in any of the months through March and receive the lower rate. But beginning April all the students will come in at the higher rate.

Great. And just as a follow-up, do you contemplate or have you been hearing of any changes potentially to tuition assistance for undergraduate programs?

No, not at all. At DoD Worldwide in July they said they'd done a study. And it actually makes sense that they wouldn't increase the undergraduate because of the high percentage of community colleges that military attend.

Thank you. I'll turn it over.

Your next question is from Jeff [Sare] with BMO Capital Markets.

Hi. It's Jeff Silber actually. Sorry, just another follow up on the price increase. I'm just curious why you decided to increase by $25? Why not $50? Why not $20? And also did you do any kind of studies to see potentially what the impact would be on demand for graduate programs in the military, since you're going above the Department of Defense tuition assistance rate. Thanks.

Sure, Jeff. This is Wally again. We referred back to our studies that we did two years ago. I guess it was February of 2007 was the last time we increased graduate tuition. And at that time we went up $25 a credit hour. This time we were a little more strategic and looked at what other graduate universities that had a significant presence in the military were charging, where their price points were, both in terms of tuition and in fees.

Also, took a look at what the stated increase was to the graduate tuition, which actually now has been announced won't happen until October 1 of 2011. And we felt that based on that and also the income level of officers who were primarily the folks in the military who take graduate tuition, that this $25 increase, since it was coming three years after our last increase, was reasonable.

Are you going to do any type of marketing get those folks to enroll maybe before April, before the price increase so we might see a little bit of bump up in new course registrations?

We actually sent out an e-mail at 4:00 at the same time we announced this press release. So we announced to the increase to our students and told them that, you know, the increase wouldn't take place till April.

We did something similar three years ago, and we did have students enroll early. It's a little too soon to tell you, you know, what that impact would be. But we did have students who enrolled early to take care of the old-- to take advantage of the old price.

Okay. Great. I'll jump back in the queue. Thanks so much.

Your next question is from Bob Wetenhall with the Royal Bank of Canada.

Hey, good afternoon. I was hoping you could provide some color kind of on a per-student basis in the civilian market, just contrast the puts and takes in terms of incremental marketing expense to get a civilian student versus kind of mixed benefits and how that shakes out.

Well, we really don't provide the level of detail on the cost of the civilian student. We-- last year our overall referral rate was 54%. And, you know, we told you that I believe in this call that the referral rate for civilians is running about 40%, and we're slightly over 50% for this year because the lower civilian rate is driving down last year's 54%, but we're still above 50%.

You know, it does cost us more based upon the outlets that we use for advertising. Although we still use a significant number of internet leads. But we also still-- we focus on these sectors law enforcement and fire and emergency management and teachers. So they're very limited and narrow sectors. We keep our costs down there.

And, you know, we're optimistic with the increased number of courses they're taking, the higher percentage of graduate courses, that we think we can keep our sales and promotion costs as a percent of revenues down.

I understand. What I'm actually asking is are the benefits of increased number of classes per student or per enrollment more than offsetting the higher student acquisition cost.

So far we think so. I mean, remember we're still into a high growth rate on a very small base. But so far we're comfortable with the data that we're getting.

And just without getting super specific, just one follow-up, could you-- what's the approximate base of civilian enrollments or course takers relative to total enrollment?

Overall, civilians are about 33%, and, you know, 20% of that or 20% overall is FSA. The difference is cash and VA and payments by reservists. So I would tell you that that's the rough percentage, and we're growing nicely.

That's great. Thank you very much.

Your next question comes from Corey Greendale with First Analysis.

Hi. Good afternoon. You made a comment about seeing success among younger, more traditional students, which is not your historical target market. First of all, what do you attribute that to? And secondly, are there any implications for your model if that continues in terms of holding separate classes for those people as opposed to putting them in the same classes with active duty military and whether you'd end up marketing to those people differently than you would your, you know, the more of an older civilian population:

Corey, it's an interesting question. I would say it's too soon to tell. We're actually seeing an increased number of applications from the under 25 year olds. And that number has gone up. And I believe in seeing a few other reports from the other companies' calls, they're seeing an increased number as well.

We aren't advertising at all because if you look at a lot of the retention, the published academic retention literature that's out there, at least for online schools the retention rate for that age bracket isn't as good as the retention rate for the older brackets.

At the same time, we are looking at ways of, at least in our College 100 class, experimenting and segregating and actually loading-- when you offer 60 sections of a class every month, we have the ability to try some experiments and put different groups in the same class section. So we're looking into that and seeing if we try it, see if there are ways to improve retention.

One of the reasons we went with a Community of Inquiry Survey, which is a validated academic survey that about 18 schools use is because it measures social engagement as well as academic engagement. And we think that with that younger sector the social engagement is that much more important to retention.

Corey, this is Harry. It is very exciting for us though. That it looks like the traditional college students are starting to go more and more online, and that is exciting trying to-- I don't think anybody in our industry really anticipated it a year ago. And it certainly is becoming a trend across the board now, so that bodes well for us, we think.

Thank you.

Your next question is from Trace Urdan Signal Hill.

Thank you. Good afternoon, guys.

Hi, Trace.

My question was about it seems to me a couple quarters ago we were discussing this change you were going to make in adding a lab course to an existing course, and that that was going to perhaps have an effect on the number of course registrations as well as perhaps sort of revenue per course registration. And I thought that was taking place in the second half of the year. Can you sort of update us on that initiative? Is it already taking effect and maybe wasn't as dramatic as at least I guess I thought it was going to be?

Hi, Trace. This is Wally. I'll give you-- the first answer is we had some other IT projects, such as the new website, that we bumped that project back just simply because it really was zero impact on the student. But Harry does have the detailed numbers, and he can give you the difference on that.

Yes, it's 5% of our total registrations, or only 1 credit lab courses right now. And we're still treating them as 1 credit lab courses, and we're still counting them. Even though they-- we only get a third of the revenue from our-- that we get from our traditional courses, we're still counting them as registrations. It's still not (inaudible) number. Last year it was 4% of our registrations. This year it's 5%.

And these-- again, these are labs for the science courses. We require you-- for instance there's a biology course. You take a three-credit course, we require you to take a 1-credit lab with that. And at this point we have not broken the numbers out yet. We have not started-- what the game plan is is sometimes next year these will become one 4-credit course for $1,000 instead of a 3-credit course for $750 and a 1-credit course for $250.

There really is no change in revenue, of course. The only change will be in the metrics of how we measure net registrations.

Yes. No, I completely understand that. So will you give us a one-quarter heads up when it happens?

We will certainly do that.

Okay. Thank you.

Your next question is from Adrienne Colby with Deutsche Bank.

Hi. Thanks for taking my question. I understand that most of your students, or at least the majority, are enrolled in eight-week courses. I was wondering if you could give us a better idea of what the split is between the 8-week and the 16-week.

The last time we reported this it was about 80%-- at the undergraduate level is about 80% for 8-week and 20% for 16-week. At the graduate level it is not as extreme as that. It's like 75% 8-week and 25% 16-week.

Great. Thank you.

Your next question is from Brandon Dobell William Blair

Hi. A couple of quick hitters here. First, is the pricing increase next year of the master's students, is that for all master's students at the time or the people that are starting after 2010?

It's everybody, whether they're returning or new. It's just for courses that start on April 1, Brandon.

Okay. Perfect. Any particular program areas or degree programs, including maybe the teaching degree, that you saw particular strength this quarter in terms of other registrations or kind of leave low interest [low]?

Brandon, I think you asked me that same question last quarter.

Probably.

I guess I just prefer not to talk about where we see the strength in our degree programs, but thanks for asking.

Fair enough. In terms of staffing up on the admissions and the financial aid side, any update where you are in terms of, you know, headcount, tenure, those kind of metrics would be helpful. Thanks.

I don't know if Harry knows this off the top of his head. I don't, Harry.

We're managing to grow. We're gaining leverage. We're managing to grow our finance department and our financial aid helpdesk people at a lower percentage than we are our civilian population. But obviously we're increasing the number of people. You know, we're up over 90% again with civilian growth this quarter over previous quarter last year, but we haven't increased our population by 90%.

But, you know, we-- you know, we're growing. That's why we're opening a new 10,000 square foot-- I mean, a 44,000 square foot facility over the next year is to continue to expand our facility base because we need more employees.

But I do believe that our growth in personnel will-- you know, it'll continue to grow, but it's a step function. It's not a pure variable cost. And we should get more leverage as we grow from those ancillary services that we provide with people.

All right. And then final one from me, any change to the number of ESOs out there for you these days?

You mean has the military changed the number of ESOs?

Outreach people.

Your outreach people. Sorry.

We-- I believe we added two outreach people since the last time we reported.

Okay. Good. Thanks, guys.

Your next question is from Kelly Flynn with Credit Suisse.

Thanks. I also have a couple quick ones. First of all, your long-term targets, you mentioned this 35% to 40% revenue growth target in the past. Are you still comfortable with that? And if so, what timeframe should we apply that to?

Kelly, I think I stated in the call or earlier on a question that we were going to look at and provide guidance for next year either in late February or the 1st of March, and we would provide everybody with updated numbers on that.

Okay. Fine. Thanks. A couple more. Just to clarify on the tuition increase, the military tuition assistance benefit you said has not increased, right? And you mentioned October 2011. Can you just clarify what do you think is going to have happen? have they announced that they'll increase it October of '11, or is that just kind of the current thinking on what might happen?

No, they've made an announcement, Kelly. They had announced in July that they examined both undergraduate tuition assistance and graduate and that they saw no need to increase undergraduate tuition assistance but that they did see a need to increase graduate tuition assistance and that they were going to take it to $350 per credit hour. And they had no specific date.

And subsequent to that, there has been a memo that has circulated, and I don't have the link to that, but I'm sure Chris could find it for anybody who wants it later on. And it says that that increase will take place on October 1 of 2011. So, you know, our feeling about this, we've been $25 over the reimbursement limit because they don't distinguish between undergraduate and graduate at the TA level.

When we increased back in 2007 we were $25 over. And we feel that, you know, having two tuition increases in the last 10 years at the graduate level isn't all that bad. And so even though this timing will come before October 1 of 2011, we're comfortable that we can justify it with many of the academic additions we've made in improving our master's programs.

Okay. And, sorry, the memo says it's increasing to $350? So you're going to be under now?

Well, we will be-- the new tuition number will be under whatever it goes to on October 1 of 2011, but we may make a different decision between now and then.

Okay. So basically you'll be over initially, but if you were to keep it at $300 you'd be under as of October 2011.

That's correct, if we didn't do an additional increase.

Okay. And then just one final one. I know everyone's been asking about this, but if you could be a little more concrete on how to model the price increase for next year this would be helpful. Because I guess what the big confusing is that you're-- although you're not changing-- you haven't changed your prices recently kind of the revenue per student has been moving around, and this quarter it went down. So and as we think about 2010 is there kind of a negative offset we should be thinking about as we try to model the impact of, you know, a 10%-ish price increase on 20% of your student body? Is there a makeshift-- sorry.

Yes. This is Wally. I don't think-- we didn't get a negative reaction three years ago. I mean, the fact of the matter is we've looked at competitively and we're the lowest. So we think we can work this without any negative reaction as well. In fact, one of the persons that asked the question, we probably will see an increase in the first quarter with people taking advantage of tuition going up in April. They'll register earlier.

But, Harry, you want to talk about how we would model this into our 2010 thinking?

I think, Kelly, you hit it right on the head. You're talking about a $75 in-- or a $50, right?

No, it's $75.

Yes, a $75 increase per course for 20% of our courses. And it starts-- you know, it starts on April 1st, so it's going to leave two-thirds of the year.

Right. But I was trying to understand is there-- I think there's [makeshift] going on here that's kind of weighing on revenue per student a little bit. Is that a factor we should--

I don't think it's significant. Civilians tend to take more graduate courses than our military, but I don't know whether it's significant enough to try to model at this point.

Okay. And, sorry, I thought it was a $25 increase. Is it $75?

It's $25 per credit hour. For a 3-credit course is $75 per course.

Oh, got it. Okay. Thanks a lot. Thanks for tolerating all those questions. Appreciate it.

No problem. No problem. Thanks.

Your next question is from Mark Marostica with Piper Jaffray.

Hey, thanks. I just wanted to follow up with one other question. I know you don't disclose this specifically, but I was curious how your SSQ has trended over the last couple quarters.

Yes, that's a great question, Mark. We've actually, you know, for the third quarter we earned our SSQ. I think for the 12th consecutive quarter we paid out the full amount. And, you know, we're pleased. We still get high survey results from the students. As we announced this time our percentage of students returning for a second degree has gone up to 40%. And, you know, all the indicators are pretty good.

We do have some indicators-- we don't disclose, you know, them specifically that we mark for needed improvement because we're not happy with the scores. But in the aggregate the 20 or 22 measures that we take increased this quarter, increased last quarter, so that we're on a streak of about 12 quarters in a row where we paid out the full SSQ bonus.

And maybe in aggregate or not getting too specific, because I imagine you don't want to disclose it, but the areas that you're focusing on, you think, you know, you could improve, could you give us a sense of what those are?

It's essentially-- it's student retention and student satisfaction are the two biggest areas. And, you know, we've talked generally on road shows about the fact that at least with our dominant military market that the highest dropout rate occurs in the first three classes.

So we have a number of initiatives where we try to improve the student experience in those first three classes. Because when we can get an undergraduate student to complete three classes and have a passing GPA of 2.0 or greater, we're graduating over 80% of them. So we have specific initiatives that we prefer to keep the specifics out this conversation, but we work-- we measure them, and we work on improving them so that we can get our students through three classes.

Great. Thank you.

Thank you.

Your next question is from Corey Greendale with First Analysis.

Hi. Thanks for taking a follow-up. I just had a couple of odds and ends. You've probably said this dozens of times, but can you just remind me if a student enrolls for a second degree with you after graduating do they count as a new student for that term?

I don't believe they do. I think you're a new student once, and that's it. So, you know, if you've got an associates degree from us and come in for a bachelor's, you'll be a returning student.

Okay. Second question I had was on the military, you've said, I think last quarter, that you thought that the Title IV, the 22% to 25% of your registrations would be Title IV students by the end of the year. Do you still feel that that's pretty accurate?

I think what we said was we'd go up 2% a quarter. And so we were like at 18% last quarter, and we went up to 20% this quarter. So if we track with our 2% a quarter, yes, it'd be about 22%, I guess.

Okay. And the last odd question I had was on the-- you mentioned benefit from the spouse grant program. Can you quantify how many students you got from that? And if it's a one-time grant, thinking ahead, what can you do to make sure those people have funding wrapped up so that they don't drop out when the $6,000 grant runs out?

That's a great question. I think we disclosed it's roughly 800 so far. And it's a $6,000 one-time grant, so that means they don't need to pay for financial aid. It's paid similarly to the tuition assistance program. But we are marketing to each of these spouses the availability of financial aid and the fact that we have the book grants. And so we believe that we'll be able to convert them over to FSA students once they take the max of $6,000.

And if their military spouse becomes a veteran and likes to go with the new veteran's, you know, Chapter 33 plan, there is transferability of the veteran's benefits now to spouses. So a lot of these spouses could start the program while their military spouse is active duty. And then when they become a veteran they can take advantage of the VA benefits to complete their education.

Great. That makes sense. Thank you.

The next question is from Amy Junker with Robert W. Baird.

Hi. Thanks. I just had a quick follow-up. How much do you think that the later start in the quarter impacts revenue and EPS? I'm just trying to think about, you know, is it just maybe a percent of the growth or is it more than that?

Well, you know what our margins are. It was about $2 million-- in September we pushed about $2 million of revenue. One week was about $2 million that we pushed back into the fourth quarter. And then you have something similar happen. And we don't know what our December enrollment will be yet. But, again, you're going to have that one week kind of pushback into January in December.

So since it pushed from September into December, and you've got the push from December on, the fourth quarter shouldn't really have an impact. Am I think of that the right way?

Yes. I mean, December alone was historically a little less than September, but, yes, you're right.

Okay.

It shouldn't have that much of an impact.

Great. Thank you.

Your next question is from Jeff Silber with BMO Capital Markets.

Hi. Just a real quick one. What tax rate are you assuming for your guidance in the fourth quarter of the year?

We're using 40.5%.

For both the quarter and the year?

Yes.

Great. Thanks so much.

Your next question is from Adrienne Colby with Deutsche Bank.

Hi. I'm just wondering if you could update us on the areas or branches of the military where you're focusing a little bit more. I know you said that you had four additional bases where you've got additional office hours in the quarter. I'm just curious if you could give us a little more color there.

Well, for competitive reasons we don't talk about the bases where we get the office hours. But, you know, we have seen a pickup in Army students. And it's rather interesting because I think we used to talk that we had roughly 2,000 students who were over in Iraq and Afghanistan. And actually that number of students has increased to 5,000 students that we currently have deployed in Iraq and Afghanistan.

But as some of the Army units are moving back from Iraq, that's actually-- we see a nice pickup with the Army over the third quarter. So typically though during the-- since 2003, the Air Force has been our number one sector in terms of, you know, percentage of students. It should be the Army, so I would have predicted it with the pullback from Iraq that the Army would take over again.

But given that I think very few of us can predict what's going to happen in Afghanistan I'm sort of hedging my bets on the prediction. But in this third quarter growth the bulk of the surprise growth to us, per se, from one branch of service was that it was greater in the Army.

Thank you.

(OPERATOR INSTRUCTIONS) As there are no further questions at this time, I'll hand the call back to Management for closing remarks.

Thank you, operator. Before we adjourn we'd like to thank all of today's participants for their questions and interest in American Public Education. Thank you and have a great evening.

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